Essay on Management Judgement And Estimates : Management

Essay on Management Judgement And Estimates : Management

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I will be looking at revenue in advance, estimated impairments of non-financial assets and depreciation to see the extent of application of management judgment and estimates.

Revenue in advance is seen on the statement of financial position under current and non-current liabilities and includes transportation sales in advance and loyalty programmes (Air New Zealand, 2014). Air (2014) states that revenue from unused tickets is recognised using estimates about timing of recognition based on the terms and conditions and historical trends. The fair value of revenues associated with Air 's loyalty programme is postponed until the member has redeemed their airpoints. NZ IAS 18 (2006c) states that revenue is to be measured at the fair value of the consideration received. This is exactly what Air has done with their loyalty programmes. The use of fair value provides Air with an updated value of their financial position as fair value is a market based measure that’s is consistent from period to period (Penman, 2007). Recognising revenue using historical trends can be risky as it assumes that historical trends will continue into the future, however, this is the most appropriate and accurate way for management to recognise the revenue in advance in this case.

Estimated impairments of non-financial assets are evaluated at each reporting date to see whether the carrying amount might not be recoverable. Goodwill is tested for impairment yearly. Both are in accordance with NZ IAS 36. NZASB (2006d) states that an entity is to test an asset for impairment at each reporting date by comparing the carrying amount to the recoverable amount. It also states that an entity must test goodwill for impairment annually....

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... statement of comprehensive income in accordance with conceptual framework except for items under the profit and loss section which has been left undisclosed. The majority of estimates that I analysed in Air 's annual report is in accordance with NZ IAS and thus is presented in the most appropriate and accurate way that management is capable of. The method of estimation chosen can change the figure disclosed in an external report so it is therefore important that consideration is taken when choosing as there are many disadvantages. I analysed the disadvantages of fair value and depreciation. For fair value, the main issue is that reported losses are misleading because the reported loss may be a result of a bad market. The main issue with depreciation is that because depreciation is fixed for each year, the usefulness of the asset in its earlier years is disregarded.

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